Mergers and Acquisitions an Upward Trend

Deloitte recently published their M&A trends 2019; this is a fascinating document for anyone who has spent any time performing or helping their clients perform M&A activities.

No matter which industry sector you work in, it won't surprise you that M&A is still an essential part of most organisation's growth strategy. What may surprise some people is that the size of the deals that organisations are looking to do is increasing, with 70% of companies anticipating larger deal sizes than in 2018. Interestingly companies in the 2018 edition of this report predicted a 63% increase over 2017, so this continues to be an upward trend.

Why M&A?

The reasons that companies are looking at M&A haven't varied significantly over the last few years, but the ones cited by Deloitte are aligned with the clients that Fifth Step are working with most closely:

20% say that expanding a customer base in existing geographic areas is the most crucial aspect for their organisation. 19% give expansion or increased diversity in products or services as their key driver. With 15% citing the acquisition of technology to be the most critical part of their organisation's acquisition strategy.

Many of Fifth Step's clients operate in the Insurance and Financial Services sector. They would add a further driver to their M&A strategy, which is to improve efficiency and reduce overheads.

Successful Deals
The success or otherwise of a deal can, of course, be measured in many different ways but consider that almost 40% of Deloitte survey respondents said that their deals fail to generate the value they expected at the onset of the transaction.

Amongst the most common (and easily resolved) reasons given for these failures were that their organisation lacked an acquisition strategy was flawed. This accounted for almost a quarter of the corporate respondents. A similar number gave insufficient or ineffective due diligence as the reason. This reason is presently trending upwards, with an increase of 4% since the last survey alone.

When asked what they considered the most important factor in achieving a successful M&A transaction the answers were clear.

23% Effective Integration

Effective integration is always the most crucial part of the process. Many of the challenges introduced by poor due diligence, for example, can at least be mitigated by an effective and well-executed integration.

Some businesses consider integration to be far more organic than it really is. They often don't have a tried and tested, proactive M&A integration approach to help ensure that they've learnt and embedded the lessons learnt previously.

19% Economic Certainty

Achieving economic certainty is always a tricky goal, particularly with the political uncertainties in the modern world. This goal this is, however, far more achievable with the combination of a sound acquisition strategy, efficient, focused due diligence and effective integration.

18% Accurately Valuing the Target

An acquisitions team can become feverish, particularly if a long sought-after target suddenly becomes available. This fever can cause a headache that induces organisations to over pay, overvalue assets or tolerate a lack of information or detail that could be even more debilitating in the long term. Implementing a well-structured approach allows flexibility where required, while managing risk more effectively, which can be invaluable in such cases.

M&A Local and Global

The location of M&A activity is likely to change according to Deloitte's respondents. For US-based organisations, their top location was Canada getting 44% of corporate executives' votes. This certainly isn't surprising. Canadian organisations have long been the target for US companies looking to internationalise and to develop their international M&A strategy.

China is the second most popular location with 28% of executives looking in this direction. Again, no surprises, there is a wealth of untapped potential in China. This doesn't come without risks though. Some of those challenges mentioned earlier (most importantly a reliable and effective due diligence and acquisition plan) should be addressed as part of the acquisition strategy, to help ensure a successful outcome.

The EU was number 3 on the list, although interestingly this excludes Germany, France, Italy and Spain. Somewhat less surprisingly Deloitte has separated the UK and with Brexit looming this makes sense.

The UK takes 4th place with 24% of executives considering M&A activity there during 2019. Despite being a country on its own it has managed to attract only 3% less of the attention than the reduced list of EU countries. 24% is, however, a drop of 7% points from 2018 when the UK occupied the number 2 location with 31% of executives considering it as a destination.

Why Now?

Some of the reasons why we see a growth in the number of organisations looking at M&A, include the growth and efficiency drivers as I've already mentioned, but one of the reasons that - often underappreciated - is that many companies have and, in many cases, still are sitting on vast cash reserves.

The existence of more significant than usual cash reserves can in some organisations be explained by their use of complex tax treatments, which sees money being spread around the world without being able to be brought back to the organisations home country in a tax efficient manner. The United States was undoubtedly included in this list until recently when President Trump reduced the cost of repatriating cash. With large cash reserves available to them, companies are keen to put their money to work. For those without such cash reserves, the ability to borrow money at highly competitive rates is also driving yet more organisations to consider and undertake M&A as a growth strategy.

Complexity Squared

Unsurprisingly the complexity of M&A transactions is growing. This is at least in some part due the fact that organisations that are now being acquired have themselves acquired organisations. Quickfire M&A activity of this kind can often lead to frayed ends and edge cases that perhaps haven't been fully integrated before the second transaction is underway. These issues typically come to light is as part of the second integration process where (hopefully) they are found before they cause any disruption.

Your Next Steps

No matter how experienced your organisation is at M&A transactions, the approach and input required to ensure that your next deal is your most successful yet should be part of your improvement plan. Particularly if you are looking at different sectors or regions, or perhaps about to undertake your first transaction.

You can reach the Fifth Step team by emailing info@fifthstep.com and find out more about our M&A and other services on our website https://fifthstep.com.